Why Commonhold has failed

In the years following the enactment of the Commonhold element of the Commonhold and Leasehold Reform Act 2002, I was lucky enough to be working with many of the UKs major developers advising on the management structures on some very large schemes.

For about 2 years, no more, the Commonhold option was a topic covered at every initial meeting. Often I would be in the room with a development director, architect, solicitor and sales director. It was always a difficult concept to promote because the solicitor had no precedents and would be working from scratch, the development director was simply not empowered to make a radical change to the existing model that worked, and the sales director could not be certain that he/she would be able to sell a new concept.

Those that were brave enough to consider the option in more detail, and there were some, usually niche developers, found difficulties that would only be resolved by trial. Ultimately they could not afford to be the guinea pig for this new concept nor would their financiers let them.

Finally there were insurmountable issues:

1. There was no evidence that selling a freehold unit would achieve a better price to compensate for the freehold value. Although it would be natural to conclude that this should be the case, the reality was that at the point of sale purchasers looked for values matching the local expectations. Fundamentally they did not expect to pay a premium simply because it was a different structure.

2. The legal advisor implied that the costs were likely to be higher because they would have to set up from scratch (despite the fact that in theory all documentation is pretty much standard). They would have to find a way to protect the interests of their client during the development period and they would have to explain in detail to all purchasers solicitors how the structure worked.

3. The Council of Mortgage Lenders stated, eventually, that it would in principal approve mortgages for Commonhold structures. This was no comfort to developers who still could not be certain that potential purchasers would find funding.

4. Commonhold did not appear to work where there was an ultimate freeholder such as the local authority, MOD or a trust. Many of the major mixed developments rely on the developer having a head lease interest.

5. Additionally, structures designed to allocate different levels of service charge, for example, estate charge, residential charges and building charges (all of which may be charged on a different basis) do not work for commonhold in its current form. Most complex schemes have more than one service charge level.

6. Commonhold limits the ability to lease a unit to under 7 years. This was immediately seen as problematic to a number of potential tenures, not least Housing Association rentals. It also gave rise to concerns about how the interests of commercial leaseholders would be met. No one was willing to take a mighty gamble to find out.

7. Despite wanting us to believe the contrary, the building industry is deeply conservative. As far as they are concerned it isn’t broke and doesn’t need fixing. Until they are incentivised or compelled to do so I cannot see them making the change.

So what of converting to Commonhold? The simple answer is; once you have bought the freehold why would you? You have an existing structure that works with the ability to amend leases to suit and to grant them for 999 years. In practice this has proved cheaper then going through conversion.

Finally there are some other interesting points to note: The ability of the Commonhold Association to collect charges are significantly weaker than those currently enshrined within leasehold statutes. There is no legislatory framework to fall back on, nor could you utilise the services of the LVT. The only remaining issues that separate it from leasehold are a diminishing asset and intransigent landlords. The first could be resolved by insisting on 999 year leases, the second is often already resolved by having leases with Residents’ Management Companies built in.

It is also wrong to assume that Commonhold is somehow a panacea for management difficulties and inability to move things forward and protect asset values. There will still be difficult individuals who hold sway over associations and there will still be those who choose not to pay.

In conclusion it seems right that a form of Commonhold should become the preferred form of residential tenure and replace the antiquated feudal system that is now almost unique to England and Wales. It needs to be revisited in significant detail and in consultation with developers, lenders and lawyers. The original legislation was a rush job. A more considered and collaborative approach might just work in these more thoughtful times.

Why is the number of LVT cases increasing?

I keep getting told that the year on year increase in LVT cases is as a result of increasingly poor management. This is a very narrow view of the reasons which are multiple. Here are just some of the reasons why there are more LVT cases:

1. There was massive growth in the leasehold sector from 1998 until 2008. Quite simply there are more leasehold owners.
2. Many of the developments built were complex urban blocks with high running costs. Some of them are poor quality. Many of the purchasers were investors or first time buyers with expectations of good returns or the ability to quickly trade up.
3. Values have stabilised or reduced in the last few years - asset growth is no longer reliable whilst costs of services have risen significantly.
4. Management is dealing with a whole raft of regulatory requirements that commenced in the last 10 years and have a further real cost impact.
5. Buildings of the last property boom are reaching their first round of major works/refurbishments. Many have not made sufficient provision for these costs.
6. Leaseholders now have access to significantly improved and more detailed resources and advice. Consumers are getting educated.
7. We are in the middle of a recession. Non-payers are chased hard, there are more disputes as a consequence.

All of these factors make additional LVT cases as much an inevitability as does poor service. Service standards, I believe, have improved beyond recognition in the last 20 years but so too has consumer awareness. This is a good thing and means that change is happening faster than the rogues will be able to keep up. 

We are reaching a tipping point where service possibilities will meet aspirations of most of the service users - choice has increased, agents are all working hard to improve their image and transparency and leasehold customers are dictating terms. Those who haven't recognised this will miss the opportunity.

How much, how many?

Debated regularly, the formula for calculating what a managing agent should be charging per unit per annum remains an interesting one.

The average management fee, by my calculation, is currently going down due to increased competition, the liquid nature of the market and the vast number of Residents' Management Companies that have been handed over to resident directors in the last few years (specifically as a result of the boom in urban developments up to 2008) and are looking for value.

Let us assume that a qualified manager manages 20 blocks averaging 25 units. A total of 500 units at say £150. This indicates an income of £75,000. Note: All the prices quoted below are modest to say the least.

Given there are 20 blocks he will require some sort of admin support and a service charge accountant.

His/her salary say £30k (he has 5 years experience) plus car say £3K plus benefits etc.
Admin, say £15K
Service charge accountant, say £22k
Overheads: office, IT, PI Insurance, memberships inc. ARMA, FSA, stationery, etc. etc. £20k

Whoops! No profit.

OK let's see, he/she could manage more - but only really if the average block size comes down or the number of units goes up. How about 800 units with average block size of 40?

Now we are talking - but this is still 20 blocks across a possibly wide geographical area.

He/she needs to attend 3 to 4 meetings (mostly evening) a year for each block. That means that in his 48 week year he will average 1.5 evening meetings a week. He will visit each scheme once per month and more if there is an issue. So 5 visits a week average. He will get upwards of 50 emails a day. He/she will need to oversee all health and safety activity, liaise with contractors, issue orders review activity on site, approve payments. He will need to oversee credit controls, appoint debt collection agents, appear at court and LVT and issue 20 budgets and organise 20 sets of accounts every year.  He/she will be on call 24/7. There is a good chance that he or she will be time poor and stressed and consequently not giving of his or her best.

Doubtless there are some out there who will comment that they can manage 10 or 15 schemes without assistance and I have no doubt that given straightforward and local schemes this is possible. I don't know what the right formula is - and I have been looking at these numbers for over 25 years! We have settled on 18-22 blocks dependent on all sorts of factors including size, geographical location, experience of the manager, the size of the support team and total income. Clearly in prime central London management fees are much higher but then so too are staff and office costs (which is why we continue to operate our support team from Worcester).

Understanding why your manager does not respond as promptly as you might like will help you to working out why there is a continual lack of satisfaction with services in leasehold management. Fact is, pricing structures are completely wrong leading to a historic lack of transparency and  increasing risks of using the cheap and cheerful alternatives that are springing up everywhere. Residential property managers are a fairly unique and widely skilled bunch. Not only must they be building and financial experts but they must be good with people and understand and apply huge rafts of legislation and regulation. They should be very highly valued.

Clarity can be provided through good contracts and service agreements with clear pricing and rewards that work for both sides. Experience counts for a great deal when something serious goes wrong, I genuinely believe cheap is not necessarily cheerful in the long term.